Shorting also known as short selling involves the sale of assets that the seller does not own, or shares that the seller has taken on loan from an exchange. To short an asset is for an investor to hope the stock price goes down. The investor never owns the asset during the shorting process. Commonly shorting is used with leverage and margin amount.
Here’s a simplified example of how shorting works:
Say you think a particular cryptocurrency is overpriced at $50 a coin. You borrow 5000 contracts(each contract is worth $1) from your exchange and sell them for $5000. Time ticks on, and as you suspected, the price falls. At $40 a coin, you buy 4000 contracts for $4,000 and return them to your broker. You walk away $1,000 richer, minus investing costs.
That’s a successful short. But what if the stock gains in popularity? Say the price rises to $60 a coin, or $6,000 for those 5000 contracts you need to return. You’re out $1,000.
Shorting, in short, is a strange transaction. You’re selling something you don’t own. And the goal is to sell high and then buy low.
Users can now make shorting based strategies to take advantage of both upswing and down swings in the market on Mudrex.
There are 2 different shorting modes available for users currently.
- Short only - The position is opened with a 'Sell' Event. Strategy buys short contracts on 'Sell' event and sells the contract on 'Buy' event.
- Long-short - Position can be opened with either 'Buy' or 'Sell' event. When the opposite event occurs, the strategy automatically takes the corresponding opp position. The position is closed only when the strategy is stopped.
More details about these trading methods are available on our help article here.
Below is the example of simple Algo to start with short trading:
Let's say you have the following conditions:
Run a strategy in Short only mode mode
- Open a short position when price decreases by 3%.
- Close the short position when price increases by 5% in the previous candle.
After saving the strategy, we can choose the parameter for running the strategy on the testing console.
- Select Bitmex/Deribit in the exchange filed using the drop-down menu from the list of available exchanges.
- BTC market will be selected as default in the market section.
- Choose the asset you want to trade using the drop-down menu.
- Select tick interval using the drop-down fields.
- Select the period of backtesting for your strategy.
- Select a trading method for the strategy. (in this case, we are choosing short only).
- Choose leverage for your strategy available options are from 1x to 100x.
- Choose the starting balance for the strategy and click start test.
You will get a graph similar to the above image.
You can backtest your old strategies and also make new ones to optimize your trading for the falling market using 2 different short trading methods and optimize your profits with a different value of leverage.